$50 million more for Twitter piles on pressure to profit

Thanks to two previous rounds of funding, microblogging startup Twitter has …

Twitter, the microblogging service that is spreading like wildfire, has secured over $50 million in its third round of funding. Strangely, the company was not even looking for the money, but news of such a large sum is placing even more pressure on Twitter's plans to begin generating revenue. The service has become everything to everyone—a microblogging platform, a customer service hub, a replacement for chat and e-mail, a bite-sized newspaper, and even a Pirate Bay trial translation service—so, naturally, everyone is waiting to see what Twitter's first major step into the prime time will be.

Twitter's latest funding comes from Benchmark Capital and Institutional Venture Partners. According to the company's announcement, though, Twitter was not even in the market since there was plenty of cash left from the $15 million it raised last May. The company is not generating any of its own revenue yet, though ironically, a growing number of third-parties have cashed in by selling applications or accepting donations for services that work with Twitter (in particular, iPhone clients and sites like Tipjoy that allow users to donate money to friends or organizations).

Still, with everyone from President Obama to Shaquille O'Neal contributing to a 900 percent growth in active users over the last year, Benchmark and IVP clearly must see an opportunity for big ROI.

No one at Twitter will discuss revenue ideas with any detail beyond some vague statements from wonderfully named co-founder Biz Stone about the value that exists for businesses and organizations from using Twitter.

Each time the topic of Twitter and revenue makes its rounds through the media, Stone's statements lead to typical speculation around basic approaches, such as charging businesses for using the service or access to live data from search.twitter.com. Heavy users, including early adopters and entrepreneurs, have even been clamoring for some kind of paid pro account that allows for things like visitor statistics or private groups. Stone told Ars in a brief interview that, while "we think there are possibilities for businesses, it could very well be that general users will find some value in our offerings too. This all remains to be seen."

"We hope to begin iterating on revenue products [in 2009]," Stone has said in the past, though he also says that "Twitter will remain free to use by everyone—individuals, companies, celebrities, etc."

As pressure grows on Twitter to mature into a profitable startup, though, the line between generating revenue and not killing the buzz for existing users by introducing fees for existing or new services will grow thinner. When Ars asked Stone how the company is taking all this pressure, he replied, "We hope folks are eager for us to begin generating revenue because they want to see Twitter succeed." At the same time, however, "We're inspired by all this goodwill but we still need to take our time and do things right."

Since launching in mid-2006, Twitter has grown rapidly while gaining new features and a slew of third-party applications that allow for richer experiences, keeping track of hot topics, and visualizing statistics and usage data. Twitter does not share absolute numbers on how many users it has worldwide, but it is estimated to be in the high seven figures (it is probably well into the eight figures now, thanks to last year's aforementioned growth percentage). Stone did tell Ars that 50 percent of users follow at least 10 people, are in turn followed by at least 10 people, and that over 90 percent of users leave their updates open to the public. That's a lot of data generated by users' constant answers to Twitter's inviting and telling tag line: "what are you doing?"

For those who don't get it. It reminds me of some great advice I heard for startup companies. If everybody tells your idea sounds really good, you are doomed, it's already been done. If nobody gets it, now you have a chance :-)

Originally posted by Charles PARNOT:For those who don't get it. It reminds me of some great advice I heard for startup companies. If everybody tells your idea sounds really good, you are doomed, it's already been done. If nobody gets it, now you have a chance :-)

+1

On another note, the 90+ figure sounds intriguing. I guess I am of the 10- percent people who have set their twitter to private-only.

I can't even begin to understand how Twitter is getting the valuations it is. It's Facebook statuses for the public plus text messaging. There's no possible way to make money with it. The only upside is advertising dollars, and it's tenuous at best to think that advertisers can datamine with twitter the way they can with Facebook, or that people will even bother clicking on ads.

I work in corporate finance so it boggles my mind that VC's and PE funds are putting up this kind of cash on a fad business with no product or revenue stream while continuing to turn down innovative businesses that are actually selling something.

Much like social networking sites, no one is likely to get twitter until a sizable portion of their personal network is using it. Not that everyone will like it, but then at least it'll make some sense to them why some of us do like it.

The valuations are coming because the investors think there's a reasonable probability that what twitter is doing with online and mobile is analogous to what Reuter did with telegraph.

As an aside: if it were easy to value the potential of new ventures, there'd be little risk and little profit in it.

Originally posted by Tracer:I can't even begin to understand how Twitter is getting the valuations it is. It's Facebook statuses for the public plus text messaging. There's no possible way to make money with it. The only upside is advertising dollars, and it's tenuous at best to think that advertisers can datamine with twitter the way they can with Facebook, or that people will even bother clicking on ads.

I work in corporate finance so it boggles my mind that VC's and PE funds are putting up this kind of cash on a fad business with no product or revenue stream while continuing to turn down innovative businesses that are actually selling something.

Originally posted by Tracer:I can't even begin to understand how Twitter is getting the valuations it is. It's Facebook statuses for the public plus text messaging. There's no possible way to make money with it. The only upside is advertising dollars, and it's tenuous at best to think that advertisers can datamine with twitter the way they can with Facebook, or that people will even bother clicking on ads.

I work in corporate finance so it boggles my mind that VC's and PE funds are putting up this kind of cash on a fad business with no product or revenue stream while continuing to turn down innovative businesses that are actually selling something.

Actually, there is a way to make money with it.Datamine the tweets.

Twitter doesn't have the robust profile data that Facebook has. Moreover, it's unlikely to get the type of clickthrough numbers that Google gets since tweets are 140 character itty bitty posts that are read in seconds and then moved on from. Facebook is barely a functioning business as is, and they have much more to work with than Twitter.

These people are thinking a lot more deeply about where the value is, and why it is what it is than most of the commenters here. They're also looking more at what Twitter *is* than what it does.

I'm not an avid Twitter user. I have an account, but I don't really use it. But I do think it's an intriguing idea, and I had no idea how it could be monetized. Dismissing these VCs is a little ridiculous. Most of them went through the tech bubble burst in a more real way than most, and they're a lot more careful about irrational exuberance than they used to be...

Twitter is an easy way to blog in very short form and keep in touch with friends. The fact that it is drop-dead easy to use and works practically the same whether you are on the desktop, a mobile phone app, or SMS, means that the experience does not degrade much when you are away from your machine. You can follow friends, news orgs like Ars and CNN, brands like Dell, or celebrities like Dave Matthews. Twitter can be a blogging service, a chat room, a marketing platform, or a news reader—it's totally up to you based on who you choose to follow and interact with.

While twitter does have a large growth rate and seemingly a lot of people are tied into it now. I still don't think it is all that popular. Of all my friends, only one of them uses twitter and he doesn't use it much. None of my coworkers use it. No one in my family aside from my wife uses it. I know anecdotal evidence is not really evidence, but it is no where near Facebook.

That said, I personally think Twitter is astounding. There is no analogy to compare twitter to existing products. It is a small step away form inverting the web model from something I reach out to into something that comes to me. Seriously if every website had a twitter feed rather then a RSS feed, it'd be done. And unlike RSS, I don't need to be at a PC to check my RSS reader. Twitter will update me in real-time (well, if the service is up and working properly) when the story gets posted.

These people are thinking a lot more deeply about where the value is, and why it is what it is than most of the commenters here. They're also looking more at what Twitter *is* than what it does.

I'm not an avid Twitter user. I have an account, but I don't really use it. But I do think it's an intriguing idea, and I had no idea how it could be monetized. Dismissing these VCs is a little ridiculous. Most of them went through the tech bubble burst in a more real way than most, and they're a lot more careful about irrational exuberance than they used to be...

As a professional in the investment banking industry I can pretty safely say that you're way off base here. Like Youtube and Facebook before it, Twitter is just another beneficiary of misallocated Valley Echo Chamber Capital. That's not to say that it's not a good site that changes the way people communicate and interact, but it's not a good business.

Google has yet to turn a profit with its purchase of YouTube, nevermind make up the opportunity cost of the investment. Facebook's US$15 billion equity valuation is an absolute joke.

I'd go so far as to say that these investments by VC's are merely speculative plays on a possible exit via acquisition by an established player.

Twitter is not a product. It is a social utility that has carved out a niche because it is free and non-intrusive. I'm extremely skeptical of its ability to monetize through advertising that makes it competitve with Facebook or Google. Twitter's assets are its users, and they can move on to something else in the blink of an eye.

Social networking right now is just a sea of proprietary ad revenue engines. Twitter just hasn't flipped the ad switch on yet. Once we have a little interoperability and some open standards, none of these services will be viable anymore. I don't even know why people even enable ads anymore when you look at how easy it is to install ad blockers.

Honest to God, the headline of this article should have been: "Someone with $50 Million Dollars Goes Batshit Insane". I like Twitter, but I could ditch it no worries. It's like facebook without all the functionality.And if I had $50 million, I sure as HELL wouldn't invest it in Twitter.

Originally posted by benjwah:Honest to God, the headline of this article should have been: "Someone with $50 Million Dollars Goes Batshit Insane". I like Twitter, but I could ditch it no worries. It's like facebook without all the functionality.And if I had $50 million, I sure as HELL wouldn't invest it in Twitter.

The best question to ask yourself when considering investments is: "Would I invest my mother's retirement money in this? Could I tell her with a straight face?"

Google has yet to turn a profit with its purchase of YouTube, nevermind make up the opportunity cost of the investment.

I know. Online video is still quite nascent, though, and I think it would be foolish to try to draw any kind of meaningful conclusions from the YouTube purchase.

quote:

Facebook's US$15 billion equity valuation is an absolute joke.

I don't disagree. But that was the MS valuation; internal valuations place Fb's value around $4bn. Are they worth it? Eh, I don't think so. They've got obscene burn rates and a poorly-monetized platform. And who the hell is going to buy them? No one. Are they really going to IPO? Good luck with that. I sure as hell wouldn't buy as a long-term investment. I think they're a viable business, but I don't think they're worth as much as the SV echo chamber thinks they are. I have similar feelings about Twitter.

quote:

I'd go so far as to say that these investments by VC's are merely speculative plays on a possible exit via acquisition by an established player.

Yes, however we both know that's unlikely in this market, though. Unrelated, but I'm worried about the long-term effects of SOX on innovation, especially WRT antitrust law. If the best exits are acquisitions then the big get bigger and... there's nothing small or medium-sized.

quote:

Twitter is not a product. It is a social utility that has carved out a niche because it is free and non-intrusive. I'm extremely skeptical of its ability to monetize through advertising that makes it competitve with Facebook or Google. Twitter's assets are its users, and they can move on to something else in the blink of an eye.

Sure, sure. I don't disagree, but that's what quite a few people said about Google back in the day, too. Now it seems blindingly obvious that Google would be a runaway success. I don't Twitter is super valuable, but it does have value. What people are thinking in realtime is surely valuable for someone or some organization that can figure out how to use this firehose of information. This is exactly what Google did when it came to monetizing intent.

Will Twitter be the next Google? The thought is utterly laughable. But I don't think that it's worthless, either.

Originally posted by Tracer:As a professional in the investment banking industry I can pretty safely say that you're way off base here. Like Youtube and Facebook before it, Twitter is just another beneficiary of misallocated Valley Echo Chamber Capital.

Twitter's funding has not followed the typical bay area pattern. It's initial VC came from the east coast as well. I am unfortunately *quite* familiar with and detest the echo chamber you talk about, but I also have to point out that you shouldn't use it as a brush to blindly paint over any particular company while ignorant of the details.

quote:

Google ... YouTube ... Facebook

There is a world of difference between the valuations, investments and purchases these brands have seen vs the several 10's of millions that have been put into twitter. Again, it's a tempting but unfair comparison.

quote:

I'd go so far as to say that these investments by VC's are merely speculative plays on a possible exit via acquisition by an established player.

Definitely the 10x pump and dump is a key part of the playbook. And there are some really brutal players that at best could be called predators. But that's not the only part. And again, just because it's a general practice does not mean it's the only thing going on in any specific deal.

quote:

Twitter's assets are its users, and they can move on to something else in the blink of an eye.

Network effect mitigates this, to some extent, but what you say is true.

Will Twitter be the next Google? The thought is utterly laughable. But I don't think that it's worthless, either.

Exactly. I don't think it's a sure thing that it'll return on these investments, but I also think it's just silly to write it off with a wave of the hand.

I don't think it's worthless, but I think you'd be mad to plunge $50M in, VC or otherwise.Like I said, I use it, but you'd only spend $50M investing in this one if you liked gambling, specifically with bad odds.If it pays off, they might well be looking at a lot more than $50M back, but not for a very, very, very long time.

There is a world of difference between the valuations, investments and purchases these brands have seen vs the several 10's of millions that have been put into twitter. Again, it's a tempting but unfair comparison.

Of course. The other companies were at different stages in their development cycles. All, however, were various types of social networking sites that had failed and continue to fail to monetize. 50+ million is an outrageous amount of money to put into a site doesn't even require that kind of growth capital. Wikipedia makes due with roughly 6 million per year in donations while having more users, more traffic, and more storage requirements than Twitter.

quote:

Definitely the 10x pump and dump is a key part of the playbook. And there are some really brutal players that at best could be called predators. But that's not the only part. And again, just because it's a general practice does not mean it's the only thing going on in any specific deal.

No one, not even the investors themselves, have publicly made a compelling argument to support the case for Twitter's growth or exit via IPO. The only clear exit here is a sale to another website and given the current valuation, Facebook, Yahoo (hah), MS, Myspace, and Google strike me as the only realistic possibilities offhand.

quote:

Network effect mitigates this, to some extent, but what you say is true.

It's a double edged sword. Anyone remember Friendster and Orkut (not including Brazilians)? While still around, Live Journal and Xanga have also been left behind largely.

quote:

Yes, however we both know that's unlikely in this market, though. Unrelated, but I'm worried about the long-term effects of SOX on innovation, especially WRT antitrust law. If the best exits are acquisitions then the big get bigger and... there's nothing small or medium-sized.

IPO's were quite viable until recently. Once markets recover, I'm sure we'll see another IPO boom. Facebook and Myspace didn't even exist when SOX was signed. They are both giants now.

quote:

What people are thinking in realtime is surely valuable for someone or some organization that can figure out how to use this firehose of information. This is exactly what Google did when it came to monetizing intent.

But this is the entire business. Twitter has no barriers to entry. It's an idea that can be coded within a month with minimal infrastructure investment. The only possible thing that could make the business unique is its ability to generate revenue. The traditional web advertising model cannot possibly work for Twitter because the user intent just isn't there. The only possible advertising models that could work would be so intrusive that they'd scuttle the platform.

There is a world of difference between the valuations, investments and purchases these brands have seen vs the several 10's of millions that have been put into twitter. Again, it's a tempting but unfair comparison.

Of course. The other companies were at different stages in their development cycles. All, however, were various types of social networking sites that had failed and continue to fail to monetize. 50+ million is an outrageous amount of money to put into a site doesn't even require that kind of growth capital. Wikipedia makes due with roughly 6 million per year in donations while having more users, more traffic, and more storage requirements than Twitter.

quote:

Definitely the 10x pump and dump is a key part of the playbook. And there are some really brutal players that at best could be called predators. But that's not the only part. And again, just because it's a general practice does not mean it's the only thing going on in any specific deal.

No one, not even the investors themselves, have publicly made a compelling argument to support the case for Twitter's growth or exit via IPO. The only clear exit here is a sale to another website and given the current valuation, Facebook, Yahoo (hah), MS, Myspace, and Google strike me as the only realistic possibilities offhand.

quote:

Network effect mitigates this, to some extent, but what you say is true.

It's a double edged sword. Anyone remember Friendster and Orkut (not including Brazilians)? While still around, Live Journal and Xanga have also been left behind largely.

quote:

Yes, however we both know that's unlikely in this market, though. Unrelated, but I'm worried about the long-term effects of SOX on innovation, especially WRT antitrust law. If the best exits are acquisitions then the big get bigger and... there's nothing small or medium-sized.

IPO's were quite viable until recently. Once markets recover, I'm sure we'll see another IPO boom. Facebook and Myspace didn't even exist when SOX was signed. They are both giants now.

quote:

What people are thinking in realtime is surely valuable for someone or some organization that can figure out how to use this firehose of information. This is exactly what Google did when it came to monetizing intent.

But this is the entire business. Twitter has no barriers to entry. It's an idea that can be coded within a month with minimal infrastructure investment. The only possible thing that could make the business unique is its ability to generate revenue. The traditional web advertising model cannot possibly work for Twitter because the user intent just isn't there. The only possible advertising models that could work would be so intrusive that they'd scuttle the platform.

Originally posted by benjwah:I don't think it's worthless, but I think you'd be mad to plunge $50M in, VC or otherwise.Like I said, I use it, but you'd only spend $50M investing in this one if you liked gambling, specifically with bad odds.If it pays off, they might well be looking at a lot more than $50M back, but not for a very, very, very long time.

That's not how venture capital works. VC funds start off with a goal of raising $X for investment purposes. No single person is dumping $50M of their own cash into Twitter. The risk is spread across multiple investors, and Twitter is hardly their only investment. You don't invest in a VC fund if you don't like high-risk investments. Beyond that, a VC fund only needs a handful of successful exits to generate their ~10% average ROI. Many lose money, some break even, and it's the tiny number of homeruns that make it worthwhile.

There are reasons for a company like Google to own a company like Twitter. While it cannot be easily monetized, that may not be the point. The point can be to mine what people are thinking at any given time, which has value even if you don't directly monetize it. Why this simple fact is beyond most people is itself beyond me.

quote:

IPO's were quite viable until recently. Once markets recover, I'm sure we'll see another IPO boom. Facebook and Myspace didn't even exist when SOX was signed. They are both giants now.

Twitter is becoming so popular it's ridiculous. You're starting to hear more and more people talk about it, not only online, but tv as well.

You wouldn't think anyone would care what you're doing every hour of every day. Still haven't figured out what the appeal is, but I'm not going to knock something that is so successful. I applaud the creator with coming up with the concept.

Twitter is becoming so popular it's ridiculous. You're starting to hear more and more people talk about it, not only online, but tv as well.

You wouldn't think anyone would care what you're doing every hour of every day. Still haven't figured out what the appeal is, but I'm not going to knock something that is so successful. I applaud the creator with coming up with the concept.

I realize that i am repeating what has already been said, but I still don't see how or why this Twitter thing is so popular. More power to the everyone who uses it including myself, but I just signed up because everybody else was.

I think that Twitter is one of the most powerful social networking tools, which helps people to connect each other share their ideas, information, and gets the most important information they are looking for.

In this economic crisis it is more important for people to understand how they can save money and survive the debt crisis, if you really want to understand about the surviving the debt crisis visit: http://www.debtcrisis.gotojignesh.com